If you are looking to invest in Oakdale Resources Limited’s (ASX:OAR), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
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What does OAR’s beta value mean?
Oakdale Resources’s beta of 0.27 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. OAR’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Does OAR’s size and industry impact the expected beta?
With a market cap of AU$1.56M, OAR falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, OAR also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap OAR but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by OAR’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can OAR’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine OAR’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. OAR’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of OAR indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts OAR’s current beta value which indicates a below-average volatility.